Three Clear Plays on Water Purification

Water treatment is becoming more urgent, and these ETFs are ready to clean up.

Samuel Taylor Coleridge's famous phrase describes life on the high seas 200 years ago. But it also applies to modern-day India and other places with regular shortages of water for drinking or agriculture.

Even in the U.S., a safe, reliable water supply is not a given. Many of the water-treatment plants built in the 1970s are nearing the last days of their usefulness just as contaminants in water that were unknown 30 years ago become more prevalent.

Over the past two months, three new exchange-traded funds focused on the water industry have hit the market, following on the success of the PowerShares Water Resources Portfolio ( PHO) 20 months ago. Water Resources, which holds only stocks that trade in the U.S., has over $2 billion in assets and is up 41% since its debut in December 2005. The fund is also fairly liquid, with average daily volume of about 683,000 shares.

All three new funds focus on companies that provide potable water, water treatment and other technologies and services related to water consumption. Their returns have been promising during their short lives. "They've had stellar performances, and that has been getting people's attention," says Ron DeLegge, editor and publisher of ETFguide.com, a San Diego-based Web site focused on ETFs. "It fits into the whole discussion on alternative energy and environmental issues."

The First Trust ISE Water Index Fund ( FIW) tracks a portfolio of domestic stocks similar to that of Water Resources. It's up 10% since it launched May 7 but hasn't gotten nearly as much traction as the original, with just $7.8 million in assets and an average daily volume of 17,000 shares.

The Claymore S&P Global Water Index ( CGW) has returned 4% since its launch on May 14. It has $245 million in assets under management and average daily volume of 258,000. The ETF now allocates about two-thirds of assets to foreign companies, holding stocks from 16 countries.

At the time of its launch, however, 78% of the portfolio was held in just four countries: the U.S., France (19.6%), Japan (16.4%) and the U.K. (14.2%). It tracks an S&P index of 50 stocks that ranks constituents according to their market capitalization as well as the percentage of revenue they derive from water.